A senior US central banker highlights banking risks from wealthy, sophisticated businesses and individuals in an age of instant transfers – and dangers posed by social media. finews.asia takes a look.
Many would have been inclined to think that the American central bank had veered slightly off-script when Federal Reserve (Fed) member Michelle Bowman held forth on the evolving nature of banking, bank culture, and bank runs in the 21st century late last week.
Although she did start with the more typical diet of inflation and interest rates at the European Central Bank in Frankfurt, she also brainstormed about our banking present – and future – while taking a close look at recent incidents in the US, notably the failure of Silicon Valley Bank.
In all that, she even directly mentioned Credit Suisse.
Lessons from SVB
But for Swiss banking and wealth management more generally, the potential lessons are nothing less than chilling. According to her, Silicon Valley had evolved to meet the demands and expectations of sophisticated, wealthy businesses and individuals like many other financial services providers.
But the risks inherent to the very nature of those services, which include instant accessibility and transferability of funds «created the potential for instability at an extensive and accelerated scale».
«For Silicon Valley Bank in particular, while the run was ignited by traditional concerns, it was much faster than previous bank runs, (it) was fueled by the most modern communication methods and social media, and was enabled through new technology that allows customers to move money on a scale and at a velocity not previously accessible directly to customers,» Bowman indicated.
She backed that up with numbers by indicating that SVB experienced a deposit outflow of $40 billion on March 9, with a further $100 billion queued up for 10 March, which was a Friday.
Speed Banking
Until then, those numbers had been unheard of. According to her, before SVB, the largest bank failure in US history was Washington Mutual at the height of the financial crisis in 2008. But back, then, the deposit outflows were far lower and took far longer.
Bowman indicated the first involving the now defunct bank lasted 23 days with outflows totaling $9.1 billion and the second $16.7 billion over 15 days. Although, unlike private banks or wealth managers, SVB relied on funding from extensive deposits from tech and health sector care firms, most of which were not insured and held in transaction accounts. Essentially, corporate banking. But, still, some parallels affect all banking businesses.
«The most significant shift has been one of speed. This is where modern technology has played a significant role, both in facilitating the transfer of funds and in the access to, and expedited flow of, information among depositors» Bowman indicated.
Cash Dilemma
Taking a step back, this potentially poses a dilemma for wealth management, but how bad is it? At first glance, most assets should be safely ensconced in mandates, some discretionary, or in more sophisticated hedge funds with gate provisions, or funds of hedge funds and private equity products. Unlike deposits, most are not on the balance sheet but simply recorded as income by way of fees.
But the wealthy and uber-wealthy, and their advisors, are human. When things turn uncertain, as they did during the financial crisis, they are apt to convert a sizeable portion of the investments into cash.
Given that, and taking a cue from Bowman, it might be an idea for industry pure plays to create a cash-to-total invested asset ratio (cash/total invested assets or AuM) internally as a risk management warning indicator when certain thresholds are reached that could hint at a wave of deposit withdrawals.
Billionaire Bank Runs
Moreover, finews.asia discussed the phenomenon indicated by Bowman at length following Credit Suisse's first-quarter results. In the days leading up to its rescue, it is increasingly obvious that high-net-worth clients got out −and they got out fast.
In the bank's wealth management business, net asset outflows in the first quarter comprised a surprisingly large quotient of nine percent of all AuM at the end of 2022. And the bank indicated that this was not just from investment mandates changing hands. Deposits represented 57 percent of all outflows in that business.
By comparison, similar outflows in its Swiss bank only comprised one percent of AuM. The same number in the asset management business? Three percent.
Not a Cause
Bowman, in her speech, however, maintained that speed and size of deposit withdrawals were a feature, but not a cause, of recent US bank failures.
«We live in a world where a wide array of communication tools—text messaging, group chats, and social media postings—have enabled expedited, if not always more accurate, dissemination of information,» Bowman said.
Here she mentions Credit Suisse explicitly in her speech, indicating that social media played a role in the bank's share price volatility, which led to other risks for the bank.
Significant Volatility
«Credit Suisse had been dealing with significant issues for an extended period, but this incident highlighted how quickly investor sentiment can change in the age of social media,». Bowman said.
For the senior wealth management executive, the events of the past few months bear sobering food for thought.
Unlike in the past, when private banking-type franchises were considered to be balance sheet light, particularly in comparison to retail and corporate banking, the business now looks very exposed to the whims of a relatively small client base – and the raw crosswinds of social media.
